Magazine Spring 1996 Research Feature

The Risks of Outsourcing IT

Michael J. Earl Reading Time: 24 min 

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While outsourcing IT has been a trend in the 1990s, it is not a new phenomenon. For example, systems development has been sourced from outside through application packages or software houses for many years. Large facilities management contracts in the late 1980s signaled a timely convergence of supply and demand factors. On the one hand, major vendors offered facilities management and other outsourcing services. On the other hand, managers who were tired of IS budget growth year after year and sometimes elusive business benefits saw an opportunity to cut IT costs, downsize the IS function, and do to IT what they were doing in other parts of the business — subcontract. The announcement of two seemingly revolutionary outsourcing contracts — at Eastman Kodak and at General Dynamics —may have given business the confidence to take on IT outsourcing on an ever-widening scale, and the issue was established on corporate agendas.1

The objectives of outsourcing are cost cutting; a desire to focus on the business, not on IT (or on “core systems, not on the total application portfolio”); or subcontracting responsibilities for operating and maintaining legacy systems. Whatever the objective, the possibility of outsourcing tends to generate strong emotions among both IS professionals and general managers. Thus research on the myths and realities of outsourcing has been followed by “how to do it” literature that aims to help companies implement outsourcing, not only in managing contracts and relationships sensibly but also in how to select sourcing options.2 These prescriptions help both the companies that are bold protagonists of IT outsourcing and those that think they have to do some outsourcing and would appreciate guidelines on being selective.

There is currently a trend toward selective or “smart” sourcing and a recognition of alternative sourcing strategies, whatever the objective. Figure 1 offers a typical analytical framework to aid in these decisions, in which the guiding parameters are the business value of a technology or application and the operational performance of the associated service. The framework suggests, for example, that outsourcing of information systems central to business strategy may be a dangerous diversion, especially if IT operations are already efficient. Insourcing in this situation is preferred.

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About the Author

Michael J. Earl is professor of information management and deputy principal at London Business School.

References

1. L. Loh and N. Venkatraman, “Determinants of Information Technology Outsourcing: A Cross-Sectional Analysis,” Journal of Management Information Systems, volume 9, Summer 1992, pp. 7–24.

2. M.C. Lacity and R. Hirschheim, “The Information Systems Out-sourcing Bandwagon,” Sloan Management Review, volume 35, Fall 1993, pp. 73–86;

J. Cross, “IT Outsourcing: British Petroleum,” Harvard Business Review, volume 73, May–June 1995, pp. 94–104;

F.W. McFarlan and R.L. Nolan, “How to Manage an IT Outsourcing Alliance,” Sloan Management Review, volume 36, Winter 1995, pp. 9–23;

M.C. Lacity, L.P. Willcocks, and D.F. Feeny, “IT Outsourcing: Maximize Flexibility and Control,” Harvard Business Review, volume 73, May–June 1995, pp. 84–93; and

D.F. Feeny, M.C. Lacity, and L.P. Willcocks, “Sourcing Information Technology Capability: A Framework for Decision-Making,” in M.J. Earl, ed., Information Management: The Organizational Dimension (Oxford: Oxford University Press, forthcoming).

3. M.J. Earl, “Outsourcing Information Services,” Public Money and Management, volume 11, 1991, pp. 17–21.

4. D.G. Copeland and J.L. McKenney, “Airline Reservation Systems: Lessons from History,” MIS Quarterly, volume 12, September 1988, pp. 353–370.

5. Lacity and Hirschheim (1993);

Cross (1995); and

McFarlan and Nolan (1995).

6. P.F. Drucker, “Controls and Management,” in C. Bonini et al., eds., Management Controls: New Directions in Basic Research (New York: McGraw-Hill, 1964), pp. 286–292.

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Comments (5)
Colton De Vos
I think that the objectives of outsourcing IT have certainly shifted since this was written. Cost-cutting is still a major motivator but so is outsourcing detailed IT work to companies that specialize in it. A lot of upsides to doing both if it is a right fit for your organization.

One downside to outsourcing your IT operations is having to let go all of your existing staff whose jobs will be replaced by your outsourcing partner.

We just wrote an article: What Happens to Your IT Team When You Outsource IT: https://www.resolutets.com/what-happens-to-your-it-team-if-you-outsource-your-it
thao phuong
Many Japanese companies are choosing to outsource much of their IT work to Vietnam. According to a November 2006 article in GlobalServices, “Vietnam: Capitalizing on the China-Japan,” by the year 2010 as much as 10% of Japan’s software outsourcing may be sent to Vietnam.
Serf Inc
We admire your point of view, seriously
Marina Svyatetska
The perception of dependency on the external service provider is often seen as an important risk for organizations. CIOs also name contractual obligations are the main barrier to outsourcing, while in the UK company culture combined with an unwillingness to relinquish control were the main inhibitors. In particular, heads of IT in public healthcare and the software industries are most likely to decline outsourcing because they feel more in control if they manage the infrastructure themselves.
Check more here: http://www.inp-software.com/blog/marina/ict-industry-europe-outsourcing-fuels-business-growth
Outsource IT India
Hi,

Thanks for the articles about Outsourcing Risks, it helped lot.